Virgin boss Branson branded the award of the franchise to FirstGroup – who bid £5.5billion for the 13-year deal – “insanity”.

And Stagecoach’s Souter, whose firm own 49 per cent of Virgin Trains, said that he was “bitterly disappointed”.

The decision was greeted with disbelief and anger from politicians, unions and rail campaigners.

They claimed the Government had been dazzled by the size of FirstGroup’s bid – £750million a year more than Virgin had offered for the franchise.

And many raised the spectre of the fiasco on the East Coast line – which had to be taken back into public ownership after two successive operators failed to live up to the promises in their bids.

Branson said: “In the case of the East Coast Main line, both winners – GNER and National Express – over-promised in order to win the franchise and spectacularly ran into financial difficulties.

“Insanity is doing the same thing over and over again and expecting different results. When will the Department for Transport learn?”

The tycoon, who has threatened to walk away from the rail business, raged on Twitter: “If you outbid somebody at auction you are smart if you do it by £1, less smart if by £1million and pretty worrying if by £750million.”

Virgin Trains are understood to be considering a legal challenge to the outcome of the bidding war.

Souter said: “I am bitterly disappointed that Virgin has been unsuccessful in its bid. After 15 years, it is difficult to imagine a West Coast rail service without the Virgin brand.”

Shadow Transport Secretary Maria Eagle also questioned the award of the contract and called on ministers to give assurances that they weren’t “blinded by the size of the payment”.

A FirstGroup train on the West Coast line

She said: “We need assurances from ministers that they haven’t been swayed by the bottom line figures instead of looking in the round about what the contract will mean for passengers and how realistic it is. ”

Shadow Secretary of State for Scotland Margaret Curran said: “The West Coast main line is vital for Scotland and it is Scots who will be hardest hit by any fare increases or a reduction in the quality or frequency of services.

“No matter which company won the franchise, passengers were going to lose out. The Government have promised that franchisees can hike fares, cut services and close ticket offices. How are passengers going to be protected ?”

Curran also backed the rail unions, who have warned that they will fight tooth and nail along the length of the west coast track against job cuts.

Bob Crow, general secretary of the RMT, said: “The new First West Coast deal is an exercise in casino franchising that lays bare the whole sordid enterprise which is rail privatisation.

“Companies promise the earth, jack up fares and slash jobs and services in a drive for profits and if the numbers don’t stack up, they throw back the keys and expect the public sector to pick up the pieces.

“FirstGroup and the Government should be left in no doubt that we will mount a massive industrial, political and public campaign to stop any attacks on our members’ jobs and the services that they provide to the travelling public as a result of this franchise award.

“We are already preparing a ballot for industrial action in light of threatened job cuts.”

Branson wrote an emotional letter of thanks to his staff, who will now be employed by First Group. And he wrote on Twitter: “We were planning no redundancies whatsoever. Hope FirstGroup keep all our staff and keep improving service for customers.”

Rail union leaders and transport campaigners say the only way FirstGroup could put extra seats on trains to maximise profits would be by stripping out catering services and buffet cars with the loss of hundreds of jobs.

But announcing the change – a day after unveiling fare rises of up to 11 per cent – Rail Minister Theresa Villiers said the deal would mean “big improvements for passengers, with more seats and plans for more services”.

FirstGroup boss Tim O’Toole said: “Our bid delivers value for taxpayers by returning premiums to the Government underpinned by sustainable growth in passenger numbers and revenues from the utilisation of significant available capacity.”